Euro leaders seek debt crisis solution as markets tumble

Euro leaders seek debt crisis solution as markets tumble

Continuing worries over the US economy and the eurozone debt crisis have seen share values fall sharply.

Shares on the main European stock markets hit their lowest level in over a year following further heavy losses this morning.

In the first half hour of trading London’s FTSE 100 was down 2.6%. In France, the CAC dropped by 2.25% and Germany’s DAX fell by 3.7%.

On bond markets the interest rate demanded by investors to lend money to Italy for 10 years rose to a new record high of 6.4%.

The move puts further pressure on Europe’s third largest economy to allay fears about its ability to finance a €1.8 trillion national debt.

Madrid’s share market recovered from an opening slump amid rumours the European Central Bank was preparing to buy hard-hit Spanish and Italian bonds.

The IBEX-35 index was up 0.53% after the first hour of trade, having slumped more than 2.0% at the open.

Dow Jones Newswires said there were rumours the ECB had asked for prices on Spanish and Italian debt, a signal that it could be about to buy.

Several London dealers disputed the rumours, saying they had no knowledge of the ECB asking for prices, it said.

Nevertheless, the rumour appeared to support the markets.

The risk premium investors demand to buy Spanish 10-year bonds over safe-bet German bonds had soared to a euro-era record 4.17 percentage points in early trade but it dropped below four percentage points on the ECB rumours.

ECB president Jean-Claude Trichet signalled the ECB would buy wilting eurozone sovereign bonds in the markets, responding to widespread calls for tough action to halt the turmoil.

But traders said the bank was buying only Portuguese and Irish debt instead of targeting Spanish and Italian bonds, which have been pummelled by investors.

Shares plummeted in overnight trading on Asian and Pacific stock markets after similar declines yesterday in Europe and the US.

Plummeting investor confidence saw declines in Japan, Hong Kong, Australia and South Korea due to weak US economic data and growing fears that Italy and Spain might need to be bailed out.

Yesterday the head of the European Commission warned that the eurozone debt crisis had likely spread to other economies.

Tokyo dived 3.7% to the lowest since the week following the country’s massive earthquake and tsunami in March in the afternoon.

European leaders hunted for solutions to the rampaging debt crisis after the resumption of the European Central Bank’s bond-buying programme failed to prop up securities in Italy and Spain.

As global stock markets sank for an eighth day, the European Commission called for another reinforcement of the European Financial Stability Facility, the €440 billion rescue fund for distressed euro-area states.

“To be effective, the EFSF needs to be credible and respected by the markets,” European Union economic and monetary commissioner Olli Rehn said on BBC Radio 4’s Today program.

Wall Street recorded its worst day yesterday since the depths of the credit crisis three years ago as Germany and the Netherlands rejected calls by European Commission president José Manuel Barroso for a stepping up of the euro zone response to the debt crisis.

Mr Barroso specifically called for a rethink of the rescue mechanism that funds weak countries such as Ireland and may have to support Italy and Spain.

The US market closed down 4.24 per cent after a day which saw heavy falls on European markets as intervention in the bond markets by the European Central Bank failed to calm fears about the solvency of Italy and Spain.

Investors in Asia slashed positions in equities and commodities and scrambled for the safety of cash and government bonds. Some Asian stocks markets fell by more than 5 per cent.

A divided ECB restarted its bond-purchase programme yesterday following a four-month hiatus. The central bank refused to extend the purchases to Italy and Spain, the two countries at the center of the current turmoil.

German chancellor Angela Merkel and French president Nicolas Sarkozy, leaders of the euro region’s two largest economies, plan to speak by phone later today, a Sarkozy aide said. The French leader will also call Spanish prime minister Jose Luis Rodriguez Zapatero.

The announcement followed signs of a rift between the European Commission and Germany over how to respond to the market’s anxiety over Spain and Italy. Madrid said yesterday it would not proceed with a planned debt issue following steep increases in its borrowing cost in recent weeks.

Mr Barroso said measures agreed just 15 days ago in Brussels when leaders met for an emergency summit “are not having their intended effect on the markets”. He criticised the “complexity and incompleteness” of the July 21st package and urged “a rapid reassessment of all elements related to the European Financial Stability Facility” (EFSF).

The German chancellor’s officials issued a sharp rebuff, describing the letter as unwelcome and unnecessary.

The Dutch finance ministry rejected reopening the discussion.

The July 21st deal on the expansion of the EFSF has yet to be enacted in national parliaments.

A spokeswoman for the Department of Finance said the relevant Irish legislation had been prioritised for passage through the Oireachtas in early September “in light of this week’s events and its impact on the euro zone area”.

The signs of divisions between euro zone members over how to respond to the latest phase of the 18-month old euro crisis are unlikely to reassure markets today.

A further fissure emerged yesterday between the ECB and the German central bank over how to respond to the crisis. As the ECB confirmed in the afternoon it was holding interest rates at 1.5 per cent, Mr Trichet caused surprise when he announced the relaunch of its unorthodox programme to buy bonds of weak euro-area governments. The programme, launched in May last year, had been dormant for more than four months.

“We were not unanimous” in the decision to relaunch the programme, Mr Trichet said, but added that an “overwhelming majority” of the 23-person governing council supported the move.

It was also reported that the German central bank was not part of that overwhelming majority which backed the ECB’s buying of government bonds.

World stock markets have lost more than $4.4 trillion since July 26th as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes.

Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. The ECB stopped short of buying Italian bonds, and ECB president Jean-Claude Trichet said Italy has to show it is “ahead of the curve” in taming its debt.

“Certainly the ECB is ready to make major efforts to relieve the situation, but first the countries have to take steps,” ECB council member Luc Coene told RTBF radio in Brussels today.“It doesn’t make sense to pour water into a bucket with a hole in it.”